Textron Aviation unites Hawker®, Beechcraft® and Cessna® brands, creating aviati

Question

Textron Aviation unites Hawker®, Beechcraft® and Cessna® brands, creating aviation's most iconic family of aircraft and the industry's broadest product portfolio and largest company-owned service network (Textron Aviation, 2016). The most noticeable feature to appear on airliners and smaller airplanes alike, since 2000, are winglets. These are wing tip extensions which reduce lift-induced drag, and provide extra lift (Larson, 2001). The original winglet design was by NASA Langley aeronautical engineer Richard Whitcomb during the 1973 oil crisis: most essentially, they reduce fuel consumption by reducing drag. One available brand of Winglets is estimated to reduce interference drag to provide a 4% fuel-burn reduction over long ranges. Thus, Winglets are now available as a standard production line option on many varieties of airplanes. Many well-known makers now utilize Winglets. For instance, Bombardier's Challenger 601 (first flown 1987), for instance, was one of the first aircraft with production-standard Winglets (Warwick, 2016).

Discussion Prompt:

Assume that you are the project manager at Textron Aviation (TXT). Textron Aviation products include corporate and business, personal, and military aircraft. You have knowledge that in recent years most of Textron Aviation’s military products have, where possible, been outfitted with Winglets. Further, the design of these wing components has evolved to make them more efficient and maximize the fuel savings they provide. Textron Aviation flight operations manager reports finding that the addition of Winglets to an existing aircraft offers fuel savings of approximately 3% of the gas bill, or 150,000 gallons of jet fuel per year (Aviation Partners, Inc., n.d.). At a cost of $1.06 per gallon (which for simplicity, we will assume to be stable), this is a significant source of cost-reduction which accrues to the end user over the useful life of an aircraft. While the useful life of the corporate craft is 30 years, Textron's research indicates that clients typically use a 10-year planning horizon, at most.

QUESTION

As Textron's production manager, you have been asked to offer an evaluation of the following:

The manager that originally brought this idea forward understood this addition of Winglets to represent a net increase in revenues of almost double of the price of the Winglet. As Textron's production manager, it is your opinion that this estimate may not encompass facts related to project production and financing. Using concepts covered in this and previous modules, analyze additional concepts that indicate other concerns that we might have in making this change, including the impact on other areas of financial policy. Calculate the rate of return that would make the net present value of this project equal to zero, and comment on its importance in terms of the impact of this project, through the diversion of existing resources, and on future growth and sustainability in the face of fluctuating revenues.

Explanation / Answer

Total savings (considering 10-year horizon ) = 150,000 * 10 * 1.06 = $1,590,000

Price of Winglet = Half of Total Savings = 0.5*1590000 = $795,000

Therefore Initial Cash Flow at Year 0 = - $795,000

Cash Flows from Year 1 Through 10 will be same = 150,000*1.06 = $159, 000

Calculating Internal Rate of Return (i.e. Rate at which NPV=0) using Excel using below cashflows

Y0 = - $795,000

Y1 = $159,000

Y2 = $159,000

Y3 = $159,000

Y4 = $159,000

Y5 = $159,000

Y6 = $159,000

Y7 = $159,000

Y8 = $159,000

Y9 = $159,000

Y10 = $159,000

IRR = 15.098%

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